- The Australian dollar is strengthening against the US dollar after the latest US inflation data showed a fall in CPI.
- RBA's Hunter spoke about Australia's labour market, stressing it remains in a tough position compared to full employment.
- With the RBA continuing to maintain a hawkish stance, there is still room for the AUD/USD pair to rise.
The AUD/USD rose 0.25% to 0.6670 on Wednesday as markets reacted to the release of US inflation data and comments from the Reserve Bank of Australia (RBA). The US Consumer Price Index (CPI) showed an annual decline in price growth, raising hopes that the Federal Reserve (Fed) may slow the pace of interest rate hikes.
Faced with a mixed economic outlook, the Reserve Bank of Australia (RBA) has taken a more aggressive stance on high inflation, tempering market expectations. With inflation remaining high, investors are expecting monetary policy to ease more slowly, with the bank forecasting just a 0.25% interest rate cut by 2024.
Daily Digest Market Trends: AUD strengthens on US CPI figures and RBA signal
- Comments from RBA Deputy Governor Sarah Hunter backed the RBA's opposition to cutting interest rates in the near term, boosting the Australian dollar. Hunter reiterated the bank's hawkish stance by saying the labour market remains tight relative to full employment.
- In the United States, the Consumer Price Index (CPI) fell to 2.5% year-on-year, below the consensus forecast of 2.7% and the previous reading of 2.9%.
- Core CPI, which excludes volatile food and energy prices, rose 3.2% from a year earlier, in line with market expectations and the July increase.
- On a month-on-month basis, the CPI rose 0.2%, while core CPI rose 0.3%, above consensus expectations.
- Money market futures traders lowered the probability of a 50 bps Fed cut to 15% and raised the probability of a 25 bps cut to 85%.
- Despite the RBA's hawkish stance, weak underlying economic activity and fading inflationary pressures mean it is likely to join a global monetary easing cycle later this year.
- If the Fed and RBA policies align, the Australian dollar could fall further.
AUD/USD technical outlook: Pair faces mixed outlook as indices recover
According to the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD) and price action, the pair is trading with a mixed outlook. The RSI is spiking upwards, which indicates buying pressure is picking up but is still stuck in the negative territory. The MACD is declining and in the red, which usually indicates selling pressure is weakening.
The pair is facing resistance at 0.6700. A break above this level can lead to further moves towards 0.6740. On the downside, support is at 0.6660 and 0.6620. A break below these levels can lead to the pair dropping towards 0.6600.
Frequently asked questions about inflation
Inflation measures the rate at which prices of representative goods and services are increasing. Headline inflation is usually expressed as a month-on-month (MoM) and year-on-year (YoY) percentage. Core inflation excludes volatile components such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the number economists pay attention to, and is the level that central banks target. Central banks are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices for a set of goods and services over a period of time. It is usually expressed as a percentage change month-over-month (MoM) and year-over-year (YoY). Core CPI is the number central banks target because it excludes food and fuel inputs, which are more volatile. When Core CPI rises above 2%, interest rates usually rise, and when it falls below 2%, interest rates fall. Rising interest rates are positive for a currency, so rising inflation usually leads to stronger currencies. The opposite is true when inflation falls.
It may seem counterintuitive, but a country's high inflation rate makes its currency more valuable, while low inflation rate makes its currency less valuable. This is because central banks typically raise interest rates to combat rising inflation, which in turn attracts more global capital inflows from investors looking for a lucrative place to park their funds.
Gold was once an asset that investors turned to because it maintained its value during times of high inflation. While investors often buy gold as a safe haven during times of extreme market turmoil, this is rarely the case. This is because when inflation is high, central banks raise interest rates to combat inflation. Rising interest rates are negative for gold as they increase the opportunity cost of holding gold or parking your money in a cash savings account compared to interest-bearing assets. Conversely, falling inflation rates tend to be positive for gold as they lower interest rates, making the lustrous metal a more viable investment option.
